In 1995, an analysis of the capital structure of Reebok provided the following results on the cost of capital and firm value.

This analysis was based on the 1995 EBIT of $420 million and a tax rate of 36.90%.
a. Why is the optimal debt ratio for Reebok so high?
b. What might be some of your concerns in moving to this optimal?

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Actual Optimal Change Debt ratio 4.42% Beta for the 95 stock Cost of equity 18.61 % Bond rating A After-tax cost 5.92% of debt Cost of capital 18.04% Firm value $3,343 milion $3,921 million $578 million (with no growth) Stock price $39.50 60.00% 3.69 55.58% 1.74 9.56% 0.95% -2.66% 28.16% B+ 6.87% 15.38% $46.64 S7.14